Global macro; Indian firm default; Orderly yield curve evolution; Legal certainty in government contracting
The global macro situation
My column in the Business Standard today, The stress in global macro, starts out with a view about sanctions against Russia, which implies that energy prices will be elevated for about a year. With this, we have four axes of stress in the world economy:
A need for enlarged capital flows into energy importing countries,
in a context of elevated debt,
at a time of slow GDP and trade growth,
while DM central banks are on an unprecedented tightening.
When I look back, the previous such articles in 2022, on the unfolding situation in macroeconomics, were Three problems for the world economy, 21 March, and Worry about middle India, 10 January.
A new paper on modelling default of Indian firms
Ever since Ed Altman’s work in 1968, economists have thought about how firm characteristics influence firm default. This kind of work has traditionally been infeasible in India, as there was no defaults database. When the IBC came along, for the first time, a list of defaulted companies based on a legalistic definition became available.
Surbhi Bhatia and Manish Singh have a new XKDR Forum working paper, Fifty years since Altman (1968): Performance of financial distress prediction models, where they construct this dataset and subject it to modern statistical analysis using many techniques. Their results are interesting in and of themselves, as this is only the second research project on Indian firms with a decent defaults dataset, and surprising in the extent to which some elements of the intuition of Altman 1968 continue to work well.
`Orderly’ evolution of the yield curve
Control-minded policy makers desire `orderly’ changes in prices. In modern finance, we see the opposite idea, e.g. see Prices, fast and slow, 9 July 2018.
In an article How “Orderly” is the Evolution of the Indian Yield Curve on The Leap Blog, 3 June 2022, Harsh Vardhan argues that even if orderly evolution of the yield curve were an appropriate objective of monetary policy, this has not been the outcome in recent years.
Legal certainty in government contracting by discoms
An odd feature in the field of electricity is that when the price of capital goods such as solar panels go down, lower prices are discovered in tenders, and then the people who have old contracts at a higher price feel the urge to renege.
When two people enter into a contract, the contract must bind: there can be no market economy if contracts don’t work. On 10 June, Akshay Jaitly and I have an article on The Leap Blog, Threats to legal certainty in government contracting by electricity distribution companies. In this, we describe a four-year process through which such attempts in Andhra Pradesh were turned down by the High Court, though private persons did suffer harm in the process. We then broaden the lens to look at this problem on a larger scale.